Monday, July 03, 2006

The changing face of hedge funds

(Source Article: Hedge funds foray into banking - Reuters)

Hedge funds are no longer limiting themselves to stock and bond markets: several multi-strategy funds are taking on the characteristics of banks as they enter the area of financing and insurance. Prompted by years of low returns on investments, many funds are beginning to finance infrastructure and private equity, as well as private loans to small companies that might not have access to the big bank lenders.

Hedge funds can provide more flexible access to financing than banks for such companies, and there’s a lot less bureaucracy involved than at a bank: “The decision maker can be accessed directly,” says Nicolas Campiche, leader of a group that selects hedge funds for clients. Hedge funds experienced a flat to slightly negative month in June, though the year as a whole so far has been a positive. (see Hedge funds down slightly in June - CNN)

Additionally, 10 of the 20 best performing funds so far this year are hedge funds; the hedge fund industry controls nearly $1.5 trillion in assets, with 200 of the approximately 8,000 total hedge funds controlling roughly $850 billion of that industry amount. Such enormous assets provide the hedge funds the necessary muscle they need to move into new areas traditionally reserved to banks. (see Hedge funds and precious metals lead the pack - Globe&Mail)

A particular area of financing that has attracted hedge funds is the so-called PIPE (private investment in public equity)—this type of investment occurs when a public company gets financing quickly (e.g., through a hedge fund) by issuing unregistered stock at a discounted price. Hedge funds are also loaning money through promissory notes, with a high annual percentage rate. This type of activity is transforming hedge funds into veritable “mini-banks”.

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